A SHG has an average size of about 15 people from a homogeneous class. They come together for addressing their common problems and are encouraged to make voluntary thrift on a regular basis. The SHG uses the pooled resources to make small interest bearing loan to their members. The process helps them imbibe the essentials of financial intermediation including prioritization of needs, setting terms and conditions and accounts keeping. This gradually builds financial discipline in all of them. They also learn to handle resources of size that is much beyond individual capacities of any of them.
SHG members begin to realize that resources are limited and have a cost. Once the groups show the mature financial behaviour, banks are encouraged to make loans to the SHG in certain multiples of the accumulated savings of the SHG. The bank loans are given without any collateral and at market interest rates. The groups continue to decide the term of loans to their own members. Since the groups' accumulated savings are part and parcel of the aggregated loans made by the groups to their members, peer pressure ensures timely repayments